The History of Oil Pipeline Regulation

1
The History of Oil Pipeline Regulation

• Steven Reed
• Steptoe Johnson LLP
• Federal Energy Regulatory Commission
• May 18, 2004

2
Three Questions

• How did oil pipelines come to be regulated by the
  federal government?
• How has federal regulation evolved over time?
• What does it mean today?

3
Background of U.S.Oil Pipeline Regulation

• Development of U.S. Oil Industry
• John D. Rockefeller/Standard Oil
• 1906 Pivotal Year

4
Origins of the Oil Industry

• What does Moby Dick have to do with the origins
  of the oil industry?
• Who was Colonel Edwin Drake?
• Why does a barrel of oil contain 42 U.S. gallons?
• Who was Samuel Van Syckel?

5
Standard Oil

• Founded in 1870 by John D. Rockefeller in
  Cleveland, Ohio
• Controlled 90 of oil refining and 80 of oil
  transportation markets in U.S.
• Posted prices
• Rebates and drawbacks
• Squeezed out independents

6
Hepburn Act of 1906

• Brought oil pipelines under Interstate Commerce
  Act of 1887 (originally applied only to
  railroads)
• President Theodore Roosevelt and Senator Henry
  Cabot Lodge, both Republicans, spearheaded the
  Hepburn Act
• Enacted rapidly in a climate of public outrage

7
Was this trip necessary?

• Standard Oil monopoly already threatened by new
  competitors (Gulf, Sun, Texaco, Phillips, etc.)
• U.S. v. Standard Oil -- antitrust suit to break
  up Rockefeller monopoly (succeeded in 1911)
• Growth of demand for gasoline and aviation fuel
  as 20th century dawned

8
What did the Hepburn Act cover?

• Interstate
• Common Carrier
• Transportation
• Of Oil
• By Pipeline

9
Regulated Activities Under ICA

• Rates and charges
• Terms of service (rules and regulations)
• Form and content of tariffs
• Accounting (USOA)
• Reporting (Form 6)
• Disclosure of shipper information (15(13))

10
What does the ICA leave unregulated?

• Construction and abandonment of oil pipelines
  (entry and exit)
• Sales and leases of oil pipeline assets
• Securities transactions
• Provision of non-transportation services

11
Contrast Oil Pipeline and Gas Pipeline Regulation

• OIL PIPELINES
• Common carriage
• Unregulated entry and exit
• Highly competitive
• Unique regulatory model

• GAS PIPELINES
• Public utilities
• Approval required for construction and
  abandonment
• Natural monopoly model

12
Oil Pipeline HistoryICC Era 1906-1977

• Pipeline Cases (1914)
• ICC Inactivity (1906-1940)
• Atlantic Refining Consent Decree (1941)
• ICC Valuation Methodology (1940s)
• Williams Pipe Line proceeding (1970s)
• Trans Alaska Pipeline System opens (1977)

13
Oil Pipeline HistoryFERC Era 1977-Present

• 1977-1985 Failed efforts to regulate
• 1985 Opinion 154-B
• 1988 Buckeye market-based rate alternative
• 1992 Energy Policy Act
• 1994 FERC rulemaking and adoption of indexing
  methodology

14
1977-1985 Failed Efforts

• Formation of FERC (Department of Energy
  Organization Act -- 1977)
• Farmers Union I (D.C. Circuit 1978)
• Opinion 154, Williams (FERC 1982)
• American Petrofina Order (FERC 1982)
• Farmers Union II (D.C. Circuit 1984)

15
1985 Opinion 154-B

• Opinion 154-B, Williams -- adopted modified
  trended original cost (TOC) methodology for oil
  pipelines
• Provided for transition rate base between
  valuation and TOC called SRB
• Intended to be cost-based rate methodology
• Many details left to individual cases

16
Cost-of-Service Cases

• ARCO Pipe Line Opinion 351 (FERC 1990)
• Kuparuk Transportation Company (FERC 1991)
• Endicott Pipeline Initial Decision (1991)
• Continued uncertainty about certain elements of
  Opinion 154-B methodology

17
1988 Buckeye market-based rate alternative

• Buckeye proceeding involved setting cost-based
  rates under Opinion 154-B
• Dispute arose over disclosure of confidential
  cost information by Buckeye
• On appeal, FERC ruled Buckeye could obtain
  lighthanded regulation by showing lack of
  significant market power in the relevant markets

18
Market-based Rate Alternative

• Buckeye rule broadened to all oil pipelines
• Pipelines originally had an election to defend
  filed rates on market power or cost-of-service
  grounds
• Lighthanded regulation now understood to mean
  market-based rates
• Burden is on pipeline to show lack of market power

19
Energy Policy Act of 1992

• Grandfathered existing rates as of 10/24/92
• Ordered FERC to develop simplified and generally
  applicable methodology
• Also required FERC to streamline procedures for
  oil pipeline regulation

20
Conclusion